Stocks rally as Evergrande worries ease
Wall Street rallied Wednesday, with the Dow and S&P 500 snapping a fourday losing streak, as investors took in an optimistic policy announcement from the Federal Reserve and encouraging news from a Chinese mega developer on the verge of collapse.
At the closing bell, the Dow Jones industrial average picked up 338.48 points, or 1 percent, to settle at 34,258.32. The S&P 500 jumped 41.45 points, or nearly 1 percent, to close at 4,395.64. The tech-heavy Nasdaq added 150.45, or nearly 1 percent, to end at 14,896.85.
Investors have been keeping close watch on Evergrande Group, which announced overnight that it had “resolved” a $36 million, yuan-backed interest payment due Thursday through negotiations. It remains unclear whether China’s second-largest real estate firm can or will pay the balance, or how it will handle two more fast-approaching interest payments: A $83.5 million, dollar-backed payment that’s also due Thursday, and a $47.5 million payment on Sept. 29. Both bonds would default if Evergrande can’t settle the interest payments within 30 days.
The company is overloaded with $300 billion in debt and has been cut off by Beijing regulators from doing any more borrowing. Economists fear a collapse could set off a contagion, sending shock waves through global markets and depressing Chinese buying power and hammering home values.
Investors also are monitoring how Beijing handles the crisis. Chinese President Xi Jinping has made limiting financial risk one of the “three tough battles” of his policy agenda, but experts are skeptical that regulators would allow such a major financial institution — Evergrande has offshoots in wealth management, hospitality, mineral extraction and manufacturing — to fail.
Overseas markets mostly trended higher. The Hang Seng in Hong Kong rose 0.5 percent, and the Nikkei in Tokyo lost 0.7 percent. The pan-European Stoxx and Germany’s DAX climbed about 1 percent, while London’s FTSE added 1.5 percent.
On Wednesday, Federal Reserve Chairman Jay Powell signaled that the central bank will likely ease support for markets if the economy continues to improve as expected. Officials also indicated higher interest rates could be coming in 2022.
Fed leaders, wrapping up their two-day policy meeting, also suggested that further progress could warrant the pullback of the sprawling bond-buying program that has buoyed markets through much of the pandemic. They also lowered their expectations for the unemployment rate later this year and reined back their estimates for the economy’s overall growth.
“There is still a lot of uncertainty for 2022 that could result in a faster or slower tapering and or the start of an interest rate hiking cycle,” said Nancy Davis, founder of Quadratic Capital Management.
Cliff Hodge, chief investment officer for Cornerstone Wealth, said market reaction has been somewhat muted as investors weigh what he described as a mixed message. “The lack of a formal taper announcement is clearly dovish, compared to a somewhat surprising hawkish dot plot, which now increases the odds of a rate hike in 2022,” he said, referring to the Fed’s interest rate projections. “At first blush, it appears that Powell has successfully threaded the needle again.”
Through aggressive monetary policy, the Fed has helped prop up the U.S. economy as the coronavirus crisis ravaged businesses and ushered in a short-lived recession. But a faster-thanexpected path to recovery has prompted calls for central bankers to ease their support.
Investors are also monitoring an escalating standoff on Capitol Hill as Congress tangles with crucial debt-limit legislation. Senate Republican Leader Mitch McConnell (Ky.) has vowed to block efforts to raise the debt limit, which allows the country to pay its bills and avoid default, insisting that Democrats pass the measure without bipartisan support. The White House has demanded that the GOP join in the legislation, as it has for years.
Former Republican treasury secretaries Henry Paulson and Steven Mnuchin met with McConnell in recent weeks to attempt to sway him to join the effort. Economists have cautioned that a U.S. default could plunge the economy into recession and set off a global financial calamity. McConnell was unmoved, The Washington Post reported
Wednesday.
Coronavirus fears have also plagued markets. Total deaths from the virus exceeded those of the 1918 Spanish flu pandemic this week, and hospitalizations and intensive care unit occupancy rates continue to rise in some states where residents are resistant to vaccination. Overall, the number of new infections in the U.S. matches levels seen earlier this year, before vaccines were made widely available.
But even on that front, investors have seen some encouraging signs. Business leaders appear to be backing President Biden’s sweeping executive order on workplace vaccine requirements. And a study from drugmakers Pfizer and BioNTech found the companies’ coronavirus vaccine was safe and effective in lower doses for children ages 5 to 11. With federal approval, which is expected in coming weeks, millions of schoolaged children could be eligible for the vaccine by Halloween.